10.19 Privatisations

Background

The Commonwealth holds around $386 billion in assets (Australian Government, 2013). It is appropriate to assess whether government should retain ownership of any of these assets that could otherwise be privatised.

Privatising assets frees capital that the Commonwealth can put towards its priorities, whether that may be paying down government debt, investing in new assets, or delivering services for the community. Privatisation allows governments to transfer ownership and its inherent risks to the private sector, which often leads to increased efficiency, productivity, competition and lower delivery costs.

Since the late 1980s, both Commonwealth and State governments have privatised a significant number of assets, recognising that their retention in government ownership is no longer necessary, effective or efficient. This resulted from a reconsideration of the role of government and a greater appreciation of the private sector’s capacity to deliver such services and to improve quality and choice. In addition, governments recognised that natural monopolies were now able to be managed through regulation, while equity considerations could be addressed through community service obligation arrangements.

After considerable privatisation activity from 1990 through to 2006, the issue of privatisation has been largely dormant at the federal level. There has, however, been an increase in privatisations at the State level including QR National, some electricity generators and retailers and port sales in New South Wales.

At the Commonwealth level, over $68 billion (Department of Finance, 2014) in capital has been released through a wide variety of asset privatisations, including: companies such as Telstra, the Commonwealth Bank, Commonwealth Serum Laboratories (CSL) and Qantas; property and infrastructure assets such as the commercial office estate and airports; and financial assets such as the Defence Service Homes Corporation Loan Portfolio.

Rationale for government intervention

In the case of public enterprises, governments have traditionally justified activities in particular markets based on equity concerns and market failure.

Where market failures exist there may be a case for government ownership of services, but only where it is the most efficient and effective response to this market failure. In practice, competition and monopoly issues are often better addressed through appropriate regulatory frameworks rather than through government ownership. Further, when the market failure has been remedied, there is a strong argument that government should withdraw from the market. Privatisation is the process that allows this to happen, with a view to further strengthening competition to supply goods and services in Australia.

Equity concerns can generally be addressed more efficiently and transparently through community service obligation arrangements and direct Budget funding, rather than through government ownership.

Current structure of the programme

Given past asset sales processes at the Commonwealth level, the scope for further major privatisations is not substantial. However, there remains a reasonably large amount of capital locked up in Commonwealth commercial and semi-commercial entities.

Trends

While the Commonwealth has not had an active privatisation agenda in recent years, many States have continued to carry out privatisations, particularly of their energy and infrastructure assets. Internationally, there has also been privatisation activity in New Zealand with the sales of electricity generation businesses, and in Europe with the recent partial privatisation of the United Kingdom’s Royal Mail being the highest profile example.

Effectively communicating privatisation objectives and benefits early on in the process, particularly those related to freeing government capital for use on other priorities sought by the public, has assisted State governments to manage public perceptions of privatisations that would otherwise not receive wide support.

Issues

There is significant capital locked up in Commonwealth commercial or semi-commercial businesses and bodies that could be put to better use if private ownership is suitable.

Twenty years ago, the Hilmer Report highlighted significant gains to the community from opening up government enterprises and other areas of the economy to competition. The Commission considers that Commonwealth bodies that operate and compete in contestable markets should be considered for their privatisation potential.

The starting point of any programme would be those bodies, such as government business enterprises, that operate commercially and are ready for sale. Other bodies with potential for sale may first need to be put on a more commercial footing.

Planning should also consider whether a privatised entity should have ongoing community service obligations where businesses operate with cross subsidies, such as Australia Post and the Australian Rail Track Corporation.

Other Commonwealth assets, including land and buildings also have potential for sale. This issue is addressed in the next section.

In terms of a broader privatisation agenda, the minimum timeframe generally required to progress the sale of a major entity is 12 to 18 months, although for complex sales, particularly where legislation is required, the timeframe is likely to be longer.

The privatisation process should generally progress in two phases:

Phase one: a scoping study to consider the objectives for a sale including any community service obligations, any regulatory or legislative requirements, actions required to prepare the business for sale, the industry in which the entity operates and preferred method of sale; and

Phase two: subject to the findings of the scoping study, prevailing market conditions and obtaining policy approval, proceeding with implementing the sale.

In addition, establishing a set of principles on government ownership of commercial entities may assist in further identifying existing assets that should be considered for privatisation and where the business case for ownership of a new asset is being considered. Existing entities could be assessed against these principles on a case-by-case basis. The principles could be along the following lines:

Government should only retain ownership of entities competing in a contestable market where there is a clear public interest case to do so. Government ownership is unlikely to be in the public interest unless:

there is a market failure which prevents the private sector from adequately providing the good or service; and

government ownership is a more efficient and effective response to this market failure than alternatives such as regulatory responses.

In some cases, government ownership may be justified only for a limited period. In these cases, arrangements should be in place to transfer the asset to the private sector when appropriate.

Potential areas for reform

Medibank’s potential sale is already announced and a scoping study commenced in October 2013.

The Commission considers a modest privatisation agenda for Commonwealth assets (and interest in assets) should be pursued across the short, medium and longer term.

Short term (2014 to 2016)

Australian Hearing

As a regulator, funder and owner of Australian Hearing, the Commonwealth plays a significant role in the hearing services market. The Government could examine the potential to increase contestability in markets where Australian Hearing has a monopoly and allow, through privatisation, it to compete in markets where it is currently precluded.

In addition, a scoping study could examine the future of the National Acoustics Laboratory and the appropriate model of industry regulation to preserve the intent of existing community service obligations.

Snowy Hydro

Snowy Hydro operates in the highly contestable National Energy Market and is the third largest electricity generator by installed capacity. The public interest case for ongoing government ownership is weak. The Commonwealth is a minority shareholder in Snowy Hydro, with a 13 per cent share compared with the 58 per cent stake owned by New South Wales and Victoria’s 29 per cent.

Defence Housing Australia

Through a national network of Housing Management Centres, as at 30 June 2013, DHA manages a total portfolio of about 18,000 properties, including off-base accommodation, valued at around $10 billion. DHA employs approximately 600 staff Australia-wide (Defence Housing Australia 2013.)

DHA houses accommodate Defence personnel who are married with dependents. This role is now expanding to provide accommodation for singles.

The property ownership and management industry is a competitive and commercial market. It is highly likely the private sector can meet the housing needs of the Australian Defence Force and their families.

A scoping study could examine Defence housing policy and the ability of the private sector to meet the housing needs of Defence personnel while also meeting the Defence Force’s operational requirements.

ASC Pty Ltd

ASC Pty Ltd (ASC, formerly the Australian Submarine Corporation) was established in 1985 solely to build submarines for the Defence Materiel Organisation. Today, ASC maintains the Collins Class submarines and is building three Hobart Class Air Warfare Destroyers. ASC employs over 2,800 personnel across three sites at Osborne (Adelaide) and Henderson (Perth).

ASC is a supplier of naval combat vessels as well as being a specialist submarine provider. It competes against domestic and international shipbuilders and is currently involved in the Air Warfare Destroyer Alliance arrangement.

ASC’s recent financial returns have been poor and the company is heavily dependent on future submarine projects. Existing government policy is to ensure work on a replacement submarine fleet is centred on the South Australian shipyards. While ASC is the only South Australian based shipbuilder with experience in submarines this does not assure it of a leading role.

Notwithstanding the challenges facing the company, the Commission believes there would be merit in selling ASC as soon as is practicable.

Medium term (Post 2016)

Australia Post

Australia Post is likely to experience significant pressure on its profitability due to the ongoing decline in letter volumes. This presents a major risk to the Budget and a risk to the continued delivery of postal services to the public, without reform of Australia Post’s community service obligations and cost structure, and/or privatisation.

Australia Post has relied on stamp price increases, growth in its parcels business (to cross‑subsidise losses in the letters business) and cost reduction initiatives to maintain its financial position. Due to the increased use of e-mail and other forms of electronic communication, Australia Post is facing a rapid decline in its letter volumes. The decline in letter volumes is likely to result in losses for the business, which may require supplementation from the Budget.

The scope for continuing to manage the decline of the business without significant reform or policy intervention is limited. Given the emerging Budget risk posed by Australia Post’s financial decline, there is a strong case for considering options for reforming Australia Post’s mandate and business operations.

The majority of Australia Post’s business is in the competitive retail, parcels and logistics markets. While this same trend has led to an increase in online shopping and growth in Australia Post’s parcels business, it only partly offsets the costs of the decline in letter volumes.

Australia Post has put forward a proposal (outlined in Section 10.22 of the Appendix) to take over and modernise the delivery of a range of government services, particularly those delivered by the Department of Human Services.

The scoping study would need to examine community service obligations in letter delivery and other ‘reserved’ services.

Moorebank Intermodal Company

The company’s role is to develop and operate an intermodal terminal as a flexible and commercially viable common user facility available to rail operators and other terminal users. Moorebank Intermodal Company aims to promote a shift from road freight to rail freight over the longer term and is an important part of the National Land Freight Strategy. It also aims to address a number of the key challenges facing the interstate freight and container markets.

Moorebank Intermodal Company intends to achieve this by leasing land that the Commonwealth owns and acquires for the intermodal terminal, gaining relevant environment and planning approvals, undertaking request for tender for the intermodal terminal’s development and operation, and then managing the funding required for its development.

The Commonwealth’s ongoing support of the Moorebank Intermodal Company will help the project to deliver on its objectives of improving national productivity through an efficient supply chain, increased freight capacity and better rail utilisation.

Subject to market conditions, the Commonwealth intends to privatise its interest in the project.

Australian Rail Track Corporation

The Australian Rail Track Corporation Limited (ARTC) was established following an agreement between the Commonwealth and State Governments, as a ‘one stop shop’ for rail operators seeking access to the interstate rail network. ARTC’s policy objective is to encourage modal shift of freight from road to rail.

ARTC manages two distinct operating businesses, the interstate network and the Hunter Valley network, which provide train operators with access to move passengers and a range of commodities including general freight, coal, iron ore, other bulk minerals and agricultural products. Train operators using ARTC tracks pay an access charge, which is governed by two separate undertakings that the Australian Competition and Consumer Commission regulates. ARTC derives over 55 per cent of its revenue from its Hunter Valley network.

The Commonwealth could privatise either all of ARTC, or just the Hunter Valley network. The monopoly characteristics of ARTC’s network can be adequately managed and regulated in the public interest, much the same as airport and electricity distribution monopolies.

A scoping study could examine an appropriate access regime, implications for ARTC’s leases and wider considerations stemming from the intergovernmental agreement that established ARTC.

Royal Australian Mint

The Royal Australian Mint manufactures Australia’s coins while Note Printing Australia, a subsidiary of the Reserve Bank of Australia, prints Australia’s notes and competes internationally for note printing contracts. As there is an international market for manufacturing currency, there is merit in considering the public interest case for retaining the Royal Australian Mint as a government body and its potential for privatisation.

COMCAR

The Department of Finance provides the Commonwealth’s car-with-driver service (COMCAR) to parliamentarians and other high-level officials and dignitaries. COMCAR also provides transportation services for guests of government and major events, such as the forthcoming G20 programme. Many of these services are provided in competition with the private sector and there is merit in considering privatisation options.

A scoping study could examine issues including legislative requirements relating to entitlement to the service and maintaining appropriate security arrangements.

Long term

NBN Co

Provisions for the eventual privatisation of NBN Co and the National Broadband Network are already in place. The existing legislation governing NBN Co requires the Commonwealth to maintain ownership of the company at least until the network is built and fully operational, which according to NBN Co’s recent strategic review will not be before the end of 2020.

The review outlines six possible network rollout scenarios. They range from continuing the 93 per cent fibre-to-the-premise rollout that NBN Co was originally tasked with, to instead using a range of mixed technology solutions to achieve lower deployment costs and timeframes. The review provides details on each scenario’s rollout methodology, estimated timeframes and possible upgrade paths to meet future broadband needs. The review also estimates the financial implications of pursuing different scenarios, both during and ultimately at the time of sale, as reflected in the internal rate of return.

In the Commission’s view, the long-term future of NBN Co should include an eventual privatisation.

References

Australian Government 2013, Mid-Year Economic and Fiscal Outlook 2013-14, Australian Government, Canberra.